This document provides an overview of cost accounting, defining it as a method for ensuring cost-effectiveness in manufacturing through detailed analysis of expenses. It outlines the advantages, limitations, and objectives of cost accounting, highlighting its role in identifying inefficiencies, aiding management decisions, and assisting in price fixation. Additionally, it compares cost accounting with financial accounting to illustrate the distinct purposes and methodologies of each accounting practice.

1. Dr.T.Sivakami
Assistant Professor
Department of Management Studies
Bon Secours College for Women
Thanjavur
Cost Accounting

2. • Definition:
Cost accounting is the accounting method for ensuring cost-
effectiveness by accumulating, organising, recording, calculating,
analysing and assessing the overall expenses incurred on a product,
process or project, etc. It is mostly used in industrial units or factories
where the goods are manufactured.

3. Advantages of Cost Accounting
• (i) A cost system reveals unprofitable activities, losses or inefficiencies
occurring in any form such as (a) Wastage of man power, idle time
and lost time. (b) Wastage of material in the form of spoilage,
excessive scrap etc., and (c) Wastage of resources, e.g. inadequate
utilization of plant, machinery and other facilities.
• (ii) Cost Accounting locates the exact causes for decrease or increase
in the profit or loss of the business. It identifies the unprofitable
products or product lines so that these may be eliminated or
alternative measures may be taken.
• (iii) Cost Accounts furnish suitable data and information to the
management to serve as guides in making decisions involving
financial considerations.

4. Advantages of Cost Accounting
• (iv) Cost Accounting is useful for price fixation purposes. Although
sale price is generally related more to economic conditions prevailing
in the market than to cost, the latter serves as a guide to test the
adequacy of selling prices.
• (v) With the application of Standard Costing and Budgetary Control
methods, the optimum level of efficiency is set.
• (vi) Cost comparison helps in cost control. Comparison may be period
to period, of the figures in respect of the same unit or factory or of
several units in an industry by employing Uniform Costs and Inter-
Firm Comparison methods. Comparison may be made in respect of
cost of jobs, process or cost centres

5. • (vii) A cost system provides ready figures for use by the Government,
wage tribunals and boards, and labour and trade unions.
• (viii) When a concern is not working to full capacity due to various
reasons such as shortage of demands or bottlenecks in production, the
cost of idle capacity can readily worked out and repealed to the
management.
• (ix) Introduction of a cost reduction programme combined with
operations research and value analysis techniques leads to economy.
• (x) Marginal Costing is employed for suggesting courses of action to be
taken. It is a useful tool for the management for making decisions.
• (xi) Determination of cost centres or responsibility centres to meet the
needs of a Cost Accounting system, ensures that the organizational
structure of the concern has been properly laid responsibility can be
properly defined and fixed on individuals.
• xii) Perpetual inventory system which includes a procedure for
continuous stock taking is an essential feature of a cost system.
• (xiii) The operation of a system of cost audit in the organization
prevents manipulation and fraud and assists in furnishing correct and
reliable cost data to the management as well as to outside parties like
shareholders, the consumers and the Government

6. Limitations of Cost Accounting
 Cost accounting is not sufficient alone to control
or reduce the cost of products or services. It is
necessary to use the data so generated to take
corrective actions which require a lot
of experience and expertise.
 Moreover, it differs from the financial accounting
we practice in day to day life. To get an accurate
result, a reconciliation statement has to be
prepared.
 In the books of accounts, many entries have to be
made twice; once in the final accounts and then
in the cost accounts, which is a tedious process.
Due to the lengthy process of duplicate entries,
there is a need for additional efforts from the
personnel. Thus it increases the labour
charges for the organisation.
 It is majorly applicable to the industries, factories
and manufacturing units where some production
function takes place. It is less useful for service
industries.

7. Limitations of Cost Accounting
•Cost accounting and cost accounting systems are expensive to maintain. Such a system
requires resources for analysis, allocation, absorption and apportionment of cost and cost
factors. Not all companies (businesses) can manage the cost (resources) involved in cost
accounting.
•Cost accounting is based on estimation. Companies assign various costs to the products
and processes on the basis of some estimation. Such assignments are dependent on
various factors i.e. availability of raw-resources, quantity of production, use of material,
scarce resources etc. As the basic premise of cost accounting is based on estimation or
variability, the reliability of this accounting system is low.
•Different organizations follow different procedures of calculating cost in cost
accounting. There is no uniformity in the procedure. For instance, some companies may
use marginal costing, some may use standard costing or some companies may use
historical or uniform costing. All these differences weaken the uniformity of cost

8. Scope of Cost Accounting
Cost accounting is being widely applied by the production units to modify the
process and maximise the profit.
Following are the various applicabilities of the cost accounting techniques:

9. Scope of Cost Accounting cont……
• Cost Analysis: Cost accounting determines the deviation of the actual cost
as compared to the planned expense, along with the reason for such
variation.
• Cost Audit: To verify the cost sheets and ensure the efficient application of
cost accounting principles in the industries, cost audits are done.
• Cost Report: Cost reports are prepared from the data acquired through
cost accounting to be analysed by the management for strategic decision
making.
• Cost Ascertainment: To determine the price of a product or service, it is
essential to know the total cost involved in generating that product or
service.
• Cost Book Keeping: Similar to financial accounting; journal entries, ledger,
balance sheet and profit and loss account is prepared in cost accounting
too. Here, the different cost incurred is debited, and income from the
product or service is credited.

10. • Cost System: It provides for time to time monitoring and evaluation of the
cost incurred in the production of goods and services to generate cost
reports for the management.
• Cost Comparison: It examines the other alternative product line or
activities and the cost involved in it, to seek a better opportunity for
generating high revenue.
• Cost Contol: Sometimes, the actual cost of a product or service becomes
higher than its standard cost. To eliminate the difference and control the
actual cost, cost accounting is required.
• Cost Computation: When the company is engaged in the production of
bulk units of a particular product or commodity, the actual per-unit cost is
derived through cost accounting.
• Cost Reduction: It acts as a tool in the hands of management to find out if
there is any scope of reducing the standard cost involved in the production
of goods and services. Its purpose is to obtain additional gain

11. Objectives of Cost Accounting
• Cost accounting aims at eliminating the loopholes in the production
process and ensures manufacturing of goods at the lowest possible
cost.

12. Objectives of Cost Accounting
• Control and Reduce Cost: Cost accounting continuously focuses on
managing the cost of production per unit to improve profitability without
compromising with the quality of the product.
• Determine Selling Price: It provides the total cost incurred in the product or
service, which is the base for fixing an appropriate selling price.
• Assist Management in Decision Making: The reports and cost sheets
generated based on cost accounting back the managerial decisions of the
organization.
• Ascertain Closing Inventory: It determines the closing inventory value at the
end of the financial year.
• Ensure Profit from Each Activity: Cost accounting reviews the cost and takes
corrective actions at each level to ensure profitability from all business
activities.

13. Objectives of Cost Accounting
• Budgeting: It generates the estimated cost of products or services to
assist in budget planning, implementation and control.
• Setting Performance Standards: It provides a standard cost of goods or
services to sets a level for the future course of action.
• Business Expansion: It estimates the cost of production at different
stages, based on this analysis, the management can plan for expansion
of the business.
• Minimizing Wastage: Cost control and reduction so attained helps in
reducing the wastage during the manufacturing process.
• Improves Efficiency: Cost accounting assures cost management, profit
appreciation and less wastage which ultimately enhances the overall
production and manufacturing process of products.

14. Difference between Cost Accounting& Financial Accounting
Financial Accounting Cost Accounting
(a) It provides the information about the
business in a general way. i.e Profit and
Loss Account, Balance Sheet of the
business to owners and other outside
partners.
(a) It provides information to the
management for proper planning,
operation, control and decision making
(b) It classifies, records and analyses the
transactions in a subjective manner, i.e
according to the nature of expense
(b) It records the expenditure in an
objective manner, i.e according to the
purpose for which the costs are incurred.
(c) It lays emphasis on recording aspect
without attaching any importance to
control.
(c) It provides a detailed system of
control for materials, labour and
overhead costs with the help of standard
costing and budgetary control.
(d) It reports operating results and
financial position usually at the end of
the year.
(d) It gives information through cost
reports to management as and when
desired(d) It gives information through
cost reports to management as and
when desired

15. Difference between Cost Accounting & Financial Accounting
Financial Accounting Cost Accounting
(e) Financial Accounts are accounts of
the whole business. They are
independent in nature.
(e) Cost Accounting is only a part of the
financial accounts and discloses profit or
loss of each product, job or service.
(f) Financial Accounts records all the
commercial transactions of the business
and include all expenses i.e
Manufacturing, Office, Selling etc.
(f) Cost Accounting relates to
transactions connected with
Manufacturing of goods and services,
means expenses which enter into
production.
(g) Financial Accounts are concerned
with external transactions i.e.
transactions between business concern
and third party.
(g) Financial Accounts are concerned
with external transactions i.e.
transactions between business concern
and third party.
h) Only transactions which can be
measured in monetary terms are
recorded
(h) Non-Monetary information likes No
of Units / Hours etc are used.
(i) Financial Accounting deals with actual
figures and facts only
(i) Cost Accounting deals with partly
facts and figures and partly estimates /
standards.

16. Difference between Cost Accounting & Financial Accounting
Financial Accounting Cost Accounting
(k) Stocks are valued at Cost or Market price
whichever is lower.
(k) Stocks are valued at Cost onlyv
(l) Financial Accounting is a positive science as
it is subject to legal rigidity with regarding to
preparation of financial statement.
(l) Cost Accounting is not only positive science
but also normative because it includes
techniques of budgetary control and standard
costing
m) These accounts are kept in such away to
meet the requirements of Companies Act 2013
as per Sec 128 & Income Tax Act, 1961 Sec
44AA
m) Generally Cost Accounts are kept
voluntarily to meet the requirements of the
management, only in some industries Cost
Accounting records are kept as per the
Companies Act.